Central bank board looks to boost economic growth

The macroeconomy will likely be dominated by pro-growth policy-makers from both the Finance Ministry and even the central bank with a political agenda to boost income in order to lure voters from various sections of society.

The monetary-policy reverse will be seen whether Tarisa Watanagase remains in charge of the central bank or is replaced.

Virabongsa has a strong stance on the matter. He wants an expansionary monetary policy and it is no surprise that he has frequently criticised the BOT's recent moves to tighten the policy. He repeatedly said that an interest-rate hike in the current environment would be harmful to the already fragile state of the economy. His ideas will be passed into monetary policy through the new Monetary Policy Committee appointed by the BOT's board.

The guru's economic ideas would not have influence over the BOT at all if the central bank remained under the former BOT Act. But the central bank shake-up lies ahead under the new BOT Act, effective from March 3, 2008.

Monetary policy could be altered at three levels: routine decision-making, a widened inflation target and inflation-target revocation.

According to the current BOT Act, the central bank is obliged to appoint a new BOT board, half of whose 12 members are chosen by the selection committee. The BOT board will play a pivotal role in picking the other committees: the Monetary Policy Committee (MPC) - which is the monetary-policy decision-maker - the Financial Institutions Policy Committee and the Payment System Committee.

The BOT's board will soon choose four of the seven members of the MPC and the four are highly likely to prefer economic growth to price stability.

As a consequence, the final decision of the MPC is likely to be determined by the majority of the committee who want to boost growth. Thus, the policy interest rate will be decided for bolstering economic growth rather than keeping inflation in check.

Moreover, the inflation target of 0-3.5 per cent is likely to be widened to serve the government's demand to boost economic activity.

The central bank knows that the target of 0-3.5 per cent, set eight years ago, is not suitable for current economic conditions in which oil prices have relentlessly spiked. It has studied the proper target range for years and will propose that the new MPC make the final decision.

However, the BOT Act requires the MPC to have a joint agreement with the Finance Ministry to set up annual inflation targets, and seeking Cabinet approval is a must for the new target. Thus, the new target will possibly be set for political purposes.

In addition, Virabongsa could revoke the policy anchor - inflation targeting - if he thinks that the target is not appropriate for the economy. He could take up monetary targeting, which the Kingdom accepted between July 1997 and May 2000.

However, the alteration cannot be done easily in the short term without amendment of the current BOT Act.

All governments like high economic growth as well as higher incomes for white- and blue-collar workers. All central banks, which have a common conservative nature, like low inflation as well as low prices of goods and services for consumers.

It is understandable that Virabongsa and his economic team want the economy to grow at a faster pace. They fret over the tightened monetary policy hampering economic growth. The rising interest rate could bring the economy into a condition like that in the United Kingdom and New Zealand - the BOT's role models for inflation targeting - which are slipping into recession.

On the other side of the coin, it is reasonable that the BOT wants to keep inflation under control. It is concerned that inflation expectation could lead to a spiralling of the wage rate, causing inflation to surge astronomically.

Two-digit inflation is not the figure the BOT wants to see, never mind the seven-digit inflation in Zimbabwe.

Different opinions make for the best solution. But the best solution should be based on the sake of the country.

Political conflict has dragged down the economy for years and many people are desperate for reconciliation. Like politics, economics needs reconciliation between the central bank and the Finance Ministry as inflation spirals amid the gloomy outlook.